Why do you buy and not develop?

[steveadl]

We have a development site we're currently holding in which we plan to build 3 small houses. The original plan was to hold all 3 upon completion, however it would depend on the figures at the time. We'll be similar to others above - the project figures look great, but it's the interest costs during construction that can throw you out. We are also about to double the size of the land holding which will make it a substantially larger project, so I doubt it will be feasible to hold all 6, and quite a massive project to even get off the ground all at once.

But that's the beauty of it. Getting the land is the hard part, but once you have it, you have so many options available to you ie. keep all, keep some, sell all, sell land to a developer, get DA then sell etc.

 

[super_sam]

On the subject of interest costs, one thing to keep in mind is second mortgage rates. These can blow up to 48% pa if construction is delayed or sales take longer than expected and the lender isnt paid out when the loan expires

 

[monster24]

yes, paying interest during a 7 months construction time for the land and increadingly for the build was tough...we financed that from the daily life which was alright but we are glad that our first contructed IP is ready for handover. The absolute beauty is we are owing only $280K (total) and it's a big house on 1/2 acre block. Tentants are already waiting to get in there asap and the house next door (similar size for house and land) is on the market for $497K. So, we have easily $200K equity within one year. It wasn't easy but well worth it. I think small developments like that let your equity grow faster. I think at the end of day it's the net worth what counting and not the number of properties you have. This real beauty costs me only ~$85 a week (after tax) so net even heavily negatively geared. You just have to surive the construction time.

Cheers
Thomas

 

[morty]

Just a bit of background on the development SupaRex and anyone else who's interested.
I bought an old house in inner melb a couple of yrs ago with my 2 brothers when we were into renovating old places, never thought about developing at all until i got chatting to the bank valuer (who also had done some dev.) who said i'd be mad not to knock it over and start again.

So i took it round to about 3 architects who all gave me the same 2 maybe three units spiel, but for some reason i went to a fourth who turned out to be a bit of a genius and to cut a long story short i now have DA for 6x two to three BR apartments including a basement carpark and a penthouse overlooking the city!

I'm actually a builder by trade so we are hell bent on building the place ourselves and then renting the apartments and covering the shortfall by other building projects. Kind of use this as the building block for our whole future portfolio.

If it was just me i'd def have to just do the pre-sales but with 3 of us we can see the bigger picture and with an apartment block like this in such a great spot (150m to tram and trainline, 5k from CBD) i reckon we'd kick ourselves down the track if we at least didn't try our best to keep them.

The banks aren't rapt about the idea (they of course want the pre-sales) but there's too much in the deal for them to just knock us back so it's a matter of just ticking all their boxes and going for it!

Exciting and scary, but i'm going to give it a crack!!

Morty

 

[NOT 2 L8]

I'm sure there are other out there that have had success with a "build and hold" strategy?

G'day SuperRex,

I am in the final stages of two single dwelling developments. I have taken delivery and one has just rented the other should be rented within a very short time. I have now pulled together total dev costs and just waiting for vals to give me a final profit/equity figure. (I build and hold.)

I will soon post the full work ups with fotos.

For me, this was a sometimes frustrating, massively educational and very satisfying excersize.

Cheers Chrisv

 

[asdf]

The banks aren't rapt about the idea (they of course want the pre-sales) but there's too much in the deal for them to just knock us back so it's a matter of just ticking all their boxes and going for it!

You could try to convince them you will target executive rental with your high level of finish to make an attemp at getting to that elusive 5% rental yield. Unfortunately developers can't afford to hold onto many cos as we all know the rental yield stinks even on a cost basis, let alone on the re-sale value. New 2-3 bed apartments as you described in Syd will go for between $800k-$1.3M and will be lucky to fetch $750 a week in rent. In Melb, the rental yields are much much lower. Add to that the recent surge in prices, higher funding charges and construction costs, its an unenviable battle for developers.

 

[steveadl]

Just a bit of background on the development SupaRex and anyone else who's interested.

Sounds exciting Morty, keep us updated on your progress.

 

[fernfurn]

Oh Morty, how exciting, you will learn so much from this experience. Do you have the right builders license to do multi storey, I thought a domestic builder couldnt do this.
One way (my way) of starting your first development cheaply. I bought an old house with the right amount of backyard and driveway to put a new townhouse in the backyard. Took me 4 years to get approval from the council, (2 storey in a backyard, shock/horror) now they do it all the time. Rented out the old front house the whole time & running my own business so easily covered costs. Owned my own home which I then rented out and shifted into the new townhouse. Lived in new townhouse for a year, demolished old house and started building new townhouse up the front, and when outside finished, put back townhouse I was living in on market. I even had the fences up and landscaping done. Sold back townhouse for huge profit (larrvely - me now pretty much retired) went like bat out of hell to finish front townhouse and moved in (CofO Fri - moved in Sat). Result - me completely owning 2 houses, living off rent
Would love to do it all again, but think this time I will buy a crappy old house and renovate (see post weird floorplan under Adding Value)

 

[Minx]

Hi Guys,

I think no doubt the build and hold strategy is a great way to accumulate properties at under market value, the big hurdle as has already been pointed out is the holding costs both while waiting for DA and during the build.

I "stumbled" on a house that i've just received planning permission to build 6 apartments on and for the life of me i want to hold them all but the banks don't agree, I wonder why?

They are considering it but if i pre-sold half or all the project now they would be throwing money at me!! And fair enough.

The one point that stops me from doing this is that for me to aquire 6 brand new apartments in inner melb would take me quite a few yrs. But if i can find a way to make this all happen i'll have a ready made portfolio with great CG for life!

I know it's a big if, but i'm determined to succeed!!

Great post
Morty

So you have your commercial unlimited builders license?

 

[allmine]

Here's a something I'm seaking some thoughts on.
As I work OS, a lot of people I work with have IP's also.
One guy has a situation which has me very interested in. Basicaly he and his wife set up a pty. ltd company.
Invested some cash in it, bought a block of land in a new development in the UK where they live, looked at the new homes being built buy the bigger companies, they then built one slightly different with a little touch more by a reputable builder with all the trimmings and warrenties to the local laws etc. Used the bigger companies advertising to draw drive bys around, with a can of spray paint, made a forsale sign up. Sold it.
He showed me his numbers on his spread sheet, nice, wont be a millionare out of it overnight but they are smart about the way they do it.
Basicaly, the money in profit from the sale on completion of a house gets 100% re-invested in the next project, then things start adding up from there.
Now they are building 3 homes, which will be No's 8, 9 and 10. Each has made a profit. So the intention is for them to eventualy build an appartment block or office building and keep it.
Just wondering, the simple surfing I have done in Aus, I see that there is a chance this can be done at home also. But, i am yet to look into how our company tax and/or structure will work with this kind of system.
He suggested to me that as all the money in profit is then re-invested for the next project, tax is minimised. But I feel it will have to be paid some day?
Any experiences with this? Is this something worth investigation?

 

[SupaRex]

G'day SuperRex,

I am in the final stages of two single dwelling developments.

I will soon post the full work ups with fotos.

For me, this was a sometimes frustrating, massively educational and very satisfying excersize.

Cheers Chrisv

Hi Chrisv,

Thanks for posting and I know I am really looking forward to your full workup and photos. What you have done sounds like what I would like to do (something fairly small for a start) and I hope it all works out for you.

Kind regards,
SupaRex

 

[Rockstar]

Hi All,

For what it's worth here is my story.

I have recently completed a duplex project and am about to build my second and have just setled on a third duplex block which I have already had plans drawn up for and priced.

I proceeded with the projects as "investment projects" ( jointly owned with my wife ) and therefore had the "intention" to hold them longer term. Once you have this intention then you are acting as an investor rather than a developer. Therefore you are not subject to any gst implications. This does not mean that you cannot sell the properties. If they are sold before 1year passes from exchange of contracts on the land (to exchange of the duplex) then you will be up for full CGT. If you wait till after 1 year then you will get the 50% CGT discount.

After doing our sums and market research we purchase the land in Oct '06. The duplex was completed by Aug '07 (I was highly efficient - I had to be)

In my case I paid 580k for the total project (land 210k + buildings 300k + council, strata titling, landscaping, etc. 70k) and after 14mths sold 1 of the duplex and held the other. The one I sold went for 403k. 13k in agents fees meant we got 390k. Therefore the profit on this one was 390k minus (580k / 2) ie: 390 - 290 = 100k. With the 50% capital gains discount this reduces the profit to 50k which is taxable. Since the property is jointly owned with my wife we split it again in 2 and, as a result, we each have to add 25k to our normal taxable income for the financial year and it gets taxed at our marginal rate we land in. So we will probably pay 10 - 15k tax in this situation - an overall earning of 85 - 90k. This is a fairly simple breakdown of what can happen tax wise. We had more incentive to sell because we actually had a capital loss to offset our tax liability. I didn't include the sums here as I didn't want to complicate the figures.
We then reset the loan to 80% of 403k for the one that we held and had access to 322k. We used this increase in equity to purchase the second block and have plans approved and the building contractor ready to begin in 2-3 weeks. In the meantime we have revalued our PPOR since this recent spike in values and accessed more equity for the third project.

It definitely is not for the faint hearted and I wouldn't recommend it for those who are working full time, those who are not close to the property being built or those with spouses who are insecure!

I could have held both duplexes and accessed the increased equity in both to proceed with my next project. The problem arises that to access equity you need to get a valuation. This valuation is nearly always below the real value. In our case the units were valued at 380k on completion. Therefore I could only access 80% of the total value which was 304k. Accessing 304k rather than selling for 403k would have made it impossible to proceed with my next project which will probably profit around 150k. Selling the unit at 403k also meant that the bank had to value the one we held at 403k as they were almost the same package. There fore we could realise our profit from the unit we sold and tap into the maximum amount of equity on the unit we held giving us the financial resources to proceed to the next project with the potential of more built in equity gains. (currently we assess this gain to be 100-150k).
We plan to hold whatever we can but will sell if it means helping us financially to move onto another development.

Developing has created a huge amount of equity gain for us so we are sticking to this "fast lane to wealth creation" strategy.

Hope all this makes some sense.

Cheers, Ian

 

[morty]

Just to clarify Minx and Celica, i hold an unlimited domestic builders licence which covers any building up to 3 storys. I've been given the all clear from my warranty insurer and so now it is up to my bank, fingers crossed!

Morty

 

[asdf]

Wow $300k to build a duplex. Thats cheap!

 

[Minx]

Just to clarify Minx and Celica, i hold an unlimited domestic builders licence which covers any building up to 3 storys. I've been given the all clear from my warranty insurer and so now it is up to my bank, fingers crossed!

Morty

Thats excellent. I know that unlimited domestic builders can build up to three stories but for some reason I imagined your development to be higher.

If you don't mind me asking morty, with your insurance, did you need to have assets totaling the build cost for them to give the go ahead?

I know a mate only has insurance to build up to 500k, which from what he has told me puts his development project in the back seat.

 

[morty]

Hi Minx,

The warranty insurance differs from company to company. You are limited to what you can build depending on your insurance limit but i put together a pretty good bus plan when i first applied for my license (about 18 mths ago) and was granted $2m insurance, per yr, based on that. That limit also had a $350k maximum on any one contract but they will look at a job if you need to go over and adjust it accordingly.

I did have to list my assets but i think they look at the person and their application rather than just what you own.

Hope this helps
Morty

 

[Rockstar]

Wow $300k to build a duplex. Thats cheap!

Yeah it was pretty cheap. Coral Homes - project builders. Each detached unit was around 150 sqm so they were pretty small 3br, 2 bathroom, double lock up gar put onto a 986 sqm block.

My next 2 are a different story as they're on a sloping site but a much better location with district views. I'm looking at around 230k ea. for units around 200 sqm. Final value should be around 475k. Total project cost around 800 - 820k - all borrowed funds.

 

[Sailesh Channan]

Wow $300k to build a duplex. Thats cheap!

We are currently building 5 duplexes with another 5 to start in the next few weeks.

These duplexes are around 370sqm in total size and consists of 4 bedroom and double lock up garages. The turn key prices that we build them for is around $295k.

The inclusions are basic but they work in an investment property. We are finding that in order to get top dollar in rent you need a reasonable level of inclusions.The basic inclusions are:
ceiling fans to all bedrooms
1x 2.5 HP a/c to living area
tiles to hall ways,wet areas and living areas
carpets to bedrooms
2 pac kitchen with laminate bench tops and 2.8m of OHC
stainless steel kitchen appliances with ceramic cook top
dishwasher
3 coat paint system
remote panel lift garage doors with remote
2 phone points per duplex
2 TV points per duplex
TV antenna
vertical blinds
security screens to all windows and doors
driveways
letterboxes

We think our pricing is reasonable in todays market. This price takes into account recent rises in material costs however we do anticipate that steel prices are due for further increases and prices and all builders will be effected.

We are in a fortunate position where we have a lot of clients that are repeat customers and referrals from existing customers. This means we do not have marketing costs, sales people and a lot of the office overheads that most builders our size encounter. Yet, we get most of the discounts from suppliers that the big builders receive.

As a result we are able to keep our construction costs down and our customers benefit and can create equity faster and re invest sooner. We are thereby creating a win win relationship with our customers.

On a technical level we also have a full time supervisor who visits each site every day to keep an eye on progress and pick up defects before they become larger problems later on. This ensures that our finished product is of a very good standard.

 

[NOT 2 L8]

Hi Chrisv,

Thanks for posting and I know I am really looking forward to your full workup and photos. What you have done sounds like what I would like to do (something fairly small for a start) and I hope it all works out for you.

Kind regards,
SupaRex

Well its taken a while to get there, so here it is.

MADELEY, PERTH - kEWARRA BEACH CAIRNS.

This property is 1700 kilometers from where we live which meant that we could not just pop down the road to check on it. Whilst we are happy with the final product it as a bit of a hassle. The major problem was that we chose a highly respected builder in Perth to do the job exactly because we needed no hassles. What we did not know at the time was that the company had undergone a massive reorganization and the name behind the brand had departed with all of the usual problems associated with this type of upheaval.

Some of the problems we encountered were:-

We had to train no less than 5 building supervisors...........

We had to retrain 4 client liaison persons. This is very frustrating because there is no continuity and you have to tell this person, who is supposed to keep you happy and contented, the project's history…….not funny after a while.

We specifically asked for rounded corners to be installed on all exposed corners in bathroom tiling. This did not happen and the supervisor tried to talk us out of it. Guess what…………

The driveway and crossover, liquid limestone, was installed without reinforcing steel. Again they tried to tell us that it was not really necessary. The driveway became a pile of very expensive rubble.

The driveway slopes slightly toward the garage so a box drain was installed. When I washed the dirt from landscaping off I noticed that the drain was filling and not draining away. Long story short, I dug around until I found the pipe and followed it to where the soak well was supposed to be and found none…………It was at this point that I, for the first and last time did my block big time. The landscapers and retic guys all bolted as I had a shovel in my hand and was looking for someone to panel beat.

When the slab was poured, the services to the island bench were installed transposed which meant that we had all these pipes and wires sticking out of a hole in the 4th bedroom……clever.

There were a myriad of other little things which they had to fix.

The moral here is that you need to be on the ball and not allow them to convince you to accept a lower standard or shoddy workmanship. Also, do not loose sight of the end goal.

As you will note from the attached spreadsheet, we decided that it would be fun for Marcia to be involved with the choices. To me it was a considerable pain in the nether regions yet, I am glad now that we did so as there were a lot of lessons learnt which came in handy as we completed the Cairns build.

There is a lot more but his is long enough.

There is a floor plan as well series of fotos here. http://www.pbase.com/chrisv1 Click on Madeleyfor Perth or Seabreeze for Cairns.

The sums and results are set out in the attached spreadie. (Finishing Sched for Perth the other for Cairns.)

Any questions, ask away.

We had a much easier run in Cairns as the build was turnkey. We still had the odd hassle but with the experience from Perth they were but a pimple on an elephant's bum. (Am I allowed to say that??)

Anyway that is the story so far. It could not have been too bad as we are finalising plans for another build in Bluewater , Trinity Beach.

Cheers Chrisv

 

[knightm]

Thanks for the informative post NT8 - very useful. My brother is building 1 atm and having similar issues, I am having services installed atm on a battleaxe subdiv that I intend on building down the track, will try and learn as much as I can from these experiences rather than make too many of my own mistakes.

We still had the odd hassle but with the experience from Perth they were but a pimple on an elephant's bum. (Am I allowed to say that??)
Chrisv

Being an elephant with acne I find this deeply offensive. course you can...